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What The OPEC News Really Means

As I write, we have just received news from the meeting of OPEC oil ministers taking place in Vienna. The production cut that some were hoping for is not coming. Maybe it is just my increased focus on energy, but I cannot remember so much attention being paid to an OPEC meeting since the late 1970s. The fact that “no news” is such big news shows the level of anticipation that existed. The main reason for that interest is that some cracks are appearing in the cartel. A group of smaller producers led by Venezuela have been openly calling for a cut in production of around 5 percent going in. The two biggest producers, however, Russia and Saudi Arabia, remained opposed to a cut in production.

Each of those has their reason. Russia seems to see the prospect of pain amongst U.S. producers as desirable and has to fund an increasingly aggressive foreign policy in the short term. The Saudis, on the other hand, are less concerned about geopolitical matters but are experts at playing the long game. For them, it seems a year of low prices is not particularly noteworthy, and it is too early to react. History told us going in that the Saudi view would prevail and that is what eventually happened.

In the immediate aftermath, though, what is interesting to me is that the reaction in oil futures hasn’t been as large as I expected. Yes, we lost around 5 percent in the 15 minutes or so after the announcement, but that only took us to levels that were prevalent just…

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